If the company is a startup, the best indicators are often the norms
for the business in which the company will be competing. Are projected
margins and ratios in line with others in their industry? The bank will
also look at credit reports and tax returns on the key individuals involved
in the startup.
If the company has some financial and credit history, the bank will
check corporate tax returns and financial statements, individual financial
statements, liens, litigation, agency reports such as Dun and Bradstreet,
etc. To ensure finances are in order, Ray recommends receiving your personal
and business credit reports prior to seeking a loan to make sure the information
is correct before going through this process. Misinformation or old loans
and liens may erroneously still be on the report. Taking care of these
errors prior to applying for a loan can streamline the process.
Fincken says: "We look for consistent, sound cash flow from operations
and good, quality assets. We look at these because they are the primary
sources of repayment. We then analyze this information and compare it
to other similar businesses as a guide." Once the records are in order,
the next step is the bank's formal application process. "Planning ahead
will help you increase your chances of receiving a loan as well as streamline
the loan timeline," Fincken advises. "Put together a business plan and
description of why you need financing; include three years of financial
statements or projections."
Expect to be asked, and prepare your answers to the following questions:
- How much money is needed?
- What is the purpose of the loan?
- How long do you anticipate using the money?
- How will the company be able to pay back the loan?
- How will the bank get paid if something goes wrong?
Here is a list of the most common reasons for loan denials:
- The company is deemed unable to repay the loan
- There is inadequate financial information
- The financial statements are unprofessionally prepared
- There are perceived critical weaknesses in management
- Applicants fail to demonstrate their ability to implement sound
accounting and management information systems.
You would certainly be reluctant to extend credit to a prospective
customer where you had significant doubt of their ability to pay. Remember
that the bank's business is to lend money, and that they must apply
the same discretion to your request.
